Engaged with the government over the new financial code: RBI Governor

The central bank on Tuesday said that it is engaged in a dialogue with the government over the new financial code and that there exists healthy mutual respect between the them.

"We have been supportively engaged in a dialogue with the government on the structure and policy of the proposed financial code," RBI Governor Rraghuram Rajan said after the central bank's monetary policy update at its Mint Street headquarters here.

"We have to reach a broad consensus on the issue first, while the finer details can be ironed-out later."

The governor's comments assumes significance as this has been the first time that he has publicly expressed his views on the government's draft financial code which proposes to clip RBI's autonomy.

The code, if implemented, will undermine RBI's ability to rein-in inflation. This will also discourage investors in taking risks in the future as RBI has been viewed by many as an anchor for financial stability in the country.

However, the governor clarified that he is still in charge of the monetary policy, as he holds the veto right.

Rajan further pointed-out that there are three reasons for a committee to replace the existing set-up where the governor, deputy governor and executive director of monetary policy take the decision on the key lending rates on the data made available to them.

The first he said was that a committee will be well represented, secondly it will equally distribute the responsibility of the policy and thirdly it will ensure continuity in policy even after the governor or any other member leaves.

"There is an healthy respect between the government and the central bank. De-facto RBI is independent. Any changes will first need to be made in the RBI Act through a legislative process," Rajan added.

The equity markets had earlier reacted negatively to the proposed financial code. However, experts feel that Rajan's views have elevated any worries that the investors might had.

"Rajan is the right person to speak on the topic and he did. The comments that the RBI and the government are on the same page has elevated any worries that the markets had," Anand James, co-head, technical research desk, Geojit BNP Paribas, told IANS.